Facts of the Case

The claimant, the primary discretionary beneficiary of two trusts, made complaints about certain decisions and actions of the trustees and the protection committee and took action to challenge a restructuring of the shareholdings held by the trustees on the basis that it would impact on the balance between immediate and remoter beneficiaries. In response, concerns were raised by the trustees that a forfeiture or ‘no compete’ clause appearing in both trusts had operated on the beneficiaries’ complaint to exclude her from benefit under the trusts so that her complaints could therefore not be considered. The clause in question stated that “whosoever contests the validity of this deed and the trust created under it, of the provisions of any conveyance of any property by any person or persons to the trustee to form and be held as part of the trust fund and of the decisions of the trustee and/or the protection committee shall cease to be a beneficiary in any of these trusts and shall be excluded from any benefits, direct or indirect, deriving from the trust fund.” The trustees therefore sought directions from the court and it was ordered that the validity of the forfeiture clause be examined as a preliminary issue.

The Decision

Applying Clavering v Ellison (1859) 7 H L Cas 707 and considering Sifton v Sifton [1938] 656, the judge held that; firstly, when deciding whether a beneficiary under a discretionary trust had forfeited their entitlement under a condition, the court must be able to anticipate from reading the clause, precisely and distinctly, the event that might cause forfeiture. It was a question of whether or not one would be able to predict from reading the trust document what the forfeiting event would be. Therefore, although there was certainty in the forfeiture clause’s prohibition against contesting the validity of the trust, the judge held that the phrase “decisions of the trustees” was not sufficiently certain. Secondly, the judge held that public policy did not prevent enforcement of a forfeiture clause where a challenge was made by a beneficiary without good cause and unsuccessfully. However, forfeiture clauses should not be used as a method to protect an illegal or invalid disposition or prevent challenges that were based on probable cause or good faith. The forfeiture clause would therefore operate against vexatious challenges without good reason but not legitimate ones. Simply, trustees cannot be exonerated from their core obligations and it would be contrary to public policy to hold that beneficiaries cannot justifiably enforce trusts. The case of Evanturel v Evanturel [1874] LR6 PC1 applied.

Points of Interest

This is a useful case for revisiting the principles surrounding forfeiture clauses and also, perhaps most notably, because it shows that the same principles apply whether a forfeiture clause is written into an inter vivos trust or a will.